Credit Card Debt in Chapter 7 Bankruptcy

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Credit card debt is one of the biggest reasons why most people think about filing for Chapter 7 bankruptcy. It's easy to get into debt especially when the economy is bad. Unexpected medical costs, fixing your home after a storm or just day-to-day purchase piling up. High credit card balances are one of the type of debts that are usually discharged or wiped out by filing bankruptcy.

Whether or not your credit card debts will be discharged depends on several factors. First, you have to pass the means test. If you pass the test and can file Chapter 7, your credit card debts still may not be discharged if there's any question that you didn't come by the debts honestly.

Creditor "Adversary" Action

When you file for bankruptcy, one or more credit card companies may possibly file an adversary proceeding or action against you. This where a creditor claims the debt you owe it shouldn't be discharged because you committed fraud in creating the debt, and so it wouldn't be fair to the creditor if the debt is wiped out.

For example, a credit card company might argue you weren't truthful on your credit card application. Exaggerating your income in order to qualify for a card or a higher credit limit is a good example. The company might also claim you ran up charges on the card knowing you were going to file for bankruptcy, and so you had no intention of paying the debt.

Factors in Credit Card Fraud

A credit card company will look at a number of factors when deciding to challenge the discharge of your credit card debt. If it files an adversary action, the bankruptcy court will look at many of these same factors to decide if all or part of the debt should be excluded from the discharge:

  • The time passed between the credit card use and the bankruptcy filing
  • The number and amount of charges you made, possibly up to a year before you filed for bankruptcy
  • If you ever went over your credit limit, and how often
  • Your financial and employment status when you filed for bankruptcy
  • Whether there was a noticeable and sudden change in your use of the credit card
  • Whether you used the card to buy luxury items or to take cash advances. Under the bankruptcy laws, luxury goods - big screen TVs, expensive clothing, furniture, etc. - totaling over $600 and bought within 90 days of filing bankruptcy won't be discharged. Likewise, cash advances over $875 taken within 70 days of filing aren't dischargeable

Avoid Problems and Get a Discharge

The best way to avoid problems like these is to be honest with your credit card use. Stop using your credit cards right now if you're seriously considering bankruptcy. It's almost guaranteed that if you rack up huge credit card bills within two to three months of filing for bankruptcy, all or most of that debt won't be discharged. You may even face criminal bankruptcy fraud charges.

There are other things you can do, too, if you think there's a chance a credit card company may challenge your discharge:

  • If you made honest use of your credit card within the past few months, tell your attorney about it during your first meeting. It may be better to hold off filing until the 70- or 90-day period passes
  • Gather credit card statements from the past year, as well as your pay stubs and other other financial records so you're prepared to defend a claim that you committed fraud when applying for or using the credit card
  • Consider filing bankruptcy under Chapter 13 instead of Chapter 7, or switch from Chapter 7 to 13 if you've already filed a Chapter 7 case. Discharge of questionable credit card debt may be easier under Chapter 13, even though you may have to pay back some of the debts during your repayment plan

Bankruptcy is meant to help you get a fresh start, not to help you take advantage of and abuse your credit cards. If you've used your credit cards honestly you shouldn't have any problems getting the debts discharged.

Questions for Your Attorney

  • What items are considered luxury goods that shouldn't be purchased within 90 days of filing for bankruptcy?
  • Can you look at my credit card bills and advise me whether they'll be challenged in bankruptcy?
  • Should you try to negotiate with the credit card companies before I file bankruptcy?
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